February 26, 2021

DealBook: String of Insider Trading Cases Shows Prosecutors Casting a Wider Net

Doug DeCinces of the Callifornia Angels in 1987. The all-star third baseman was indicted on insider trading charges.Jeff Robbins/Associated PressDoug DeCinces of the Callifornia Angels in 1987. The all-star third baseman was indicted on insider trading charges.

The end of November included a veritable rush of insider trading prosecutions, belying the notion that the government goes on hiatus at the end of the year.

Three cases filed by prosecutors in Manhattan, Los Angeles and New Jersey involve defendants from a variety of backgrounds. The cases illustrate that insider trading can involve those in all walks of life, and not just savvy traders. They include:

  • A former portfolio manager at a leading hedge fund firm in the most lucrative insider trading case ever charged;
  • A former major league baseball player accused of insider trading as well as tipping off three friends to make up for poor investment advice he had given them earlier;
  • A web of six defendants that includes a group of high school buddies who are accused of passing along information while playing basketball.

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Interestingly, none of the cases involved the use of wiretaps to capture how the information was disclosed, evidence that was a central feature of other high-profile insider trading prosecutions in the last two years.

The case that has grabbed the most attention is the prosecution of Mathew Martoma, who worked as a portfolio manager at SAC Capital Advisors, the $14 billion hedge fund firm controlled by Steven A. Cohen. Mr. Martoma is accused of receiving information about problems in a clinical drug trial conducted by Elan and Wyeth that led the hedge fund to sell out its $700 million position in the companies and then take a bearish position, all in the matter of a few days.

According to prosecutors, that led SAC Capital to make gains and avoid losses totaling $276 million, dwarfing the $63 million reaped by Raj Rajaratnam, who is serving an 11-year prison term following his convictions in 2011 for insider trading.

Mr. Cohen and SAC Capital have denied any involvement in trading on confidential information. In a recent conference call with investors, Mr. Cohen said, “We take these matters very seriously, and I am confident that I acted appropriately.”

The firm also disclosed that the Securities and Exchange Commission had sent it a so-called Wells notice that its staff is considering filing civil charges based on the illegal trading by Mr. Martoma and perhaps others. This would not directly accuse the firm of engaging in insider trading, but instead claim that SAC Capital failed to properly oversee its employees.

An obscure provision of a federal statute adopted in 1988 allows the S.E.C. to seek a triple penalty for any profits or losses avoided when a “controlling person” knowingly or recklessly fails “to establish, maintain, or enforce any policy or procedure” against insider trading. Under this provision, even if Mr. Cohen and other SAC Capital executives were not personally aware of insider trading by portfolio managers, turning a blind eye to it could be enough to expose the firm to substantial liability.

In another case, federal prosecutors in Los Angeles filed charges late last month against a former major league baseball player, Douglas V. DeCinces, and three men that he is accused of tipping about the impending acquisition of Advanced Medical Optics. The government claims he received the inside information from the company’s chief executive and passed it on to make up for “prior bad investment recommendations” while also earning approximately $1.3 million himself.

This is a case in which it is — pardon the cliché — a little hard to follow the players without a scorecard. Mr. DeCinces and two of his co-defendants settled similar S.E.C. civil charges in August 2011, which indicated that the case was likely to be over for them. In August 2012, the S.E.C. charged Advanced Medical Optics’ chief executive, James V. Mazzo, and the third person who is said to have received information from Mr. DeCinces. Another defendant in that case was a baseball Hall of Fame member, Eddie C. Murray, a former teammate of Mr. DeCinces’s on the Baltimore Orioles, who settled the charges.

The indictment does not contain allegations different from the S.E.C.’s civil case, and it is unclear why prosecutors waited more than a year to pursue criminal charges against Mr. DeCinces and others. But Mr. Mazzo is not named as a defendant in the criminal case, only identified in the indictment as the “source.” And while three recipients of the tips are charged in the latest indictment, Mr. Murray is not one of them.

An interesting question is whether Mr. Mazzo is cooperating with the government in exchange for a reduced sentence. The typical insider trading case involves charges against the tipper because that is the person responsible for the violation (though there have been exceptions, like in case involving Mr. Martoma of SAC Capital).

Proving a case against a recipient is difficult without the cooperation of the tipper, unless there are wiretaps or other evidence to show how the information was passed. Prosecutors could add Mr. Mazzo as a defendant later, but not including him now is puzzling because the S.E.C. civil complaints have virtually all the information recited in the indictment.

One possibility is that prosecutors hope to use Mr. Mazzo against Mr. DeCinces and the others if a plea agreement can be worked out. Another possibility is a different cooperating witness can provide evidence of how the inside information was passed around, and prosecutors are waiting to see whether Mr. Mazzo will cut a deal before moving against him.

Another case of note involves six defendants who are accused of creating a web of inside information about pharmaceutical companies. They are accused of obtaining information from three who worked for firms in the industry. Unlike the other two insider trading prosecutions, this was not a one-time event but a scheme to break the law over nearly four years by using secret code names and passing along cash payments to the sources to avoid detection.

The defendants sought to hide their actions by saying things like “how’s the Fat Man doing?” to refer to the inside information and setting up meetings to make cash payments with “I have some vacation pictures for you.” One defendant is accused of putting together a research file to try to cover the group’s actions. In testimony in an S.E.C. investigation about some of the trading, he denied knowing anyone at one of the pharmaceutical companies.

A conspiracy like this is dependent on each participant keeping a wall of silence. Unfortunately, the criminal complaint describes a conversation in September with a cooperating witness in which one defendant boasted that investigators would not be able to be able “to link everybody up” because they were careful.

Given the number of defendants and unindicted co-conspirators who traded and how long the scheme lasted, the gains were surprisingly low, totaling less than $1.5 million. The defendants may have hoped to avoid detection by keeping the trades small, but in the end someone turned on them.

All three cases involve very disparate means of obtaining information and vastly different sums at stake. But they all indicate that the government is not letting up on its aggressive stance in pursuing both criminal and civil insider trading cases, even when they don’t have wiretap evidence.


Article source: http://dealbook.nytimes.com/2012/12/03/string-of-insider-trading-cases-shows-prosecutors-casting-a-wider-net/?partner=rss&emc=rss

DealBook: Rajat Gupta Convicted of Insider Trading

Rajat K. Gupta leaving the federal court in Manhattan after his guilty verdict on Friday.Lucas Jackson/ReutersRajat K. Gupta leaving the federal court in Manhattan after his guilty verdict on Friday.

Rajat K. Gupta, the retired head of the consulting firm McKinsey Company and a former Goldman Sachs board member, was found guilty on Friday of conspiracy and securities fraud for leaking boardroom secrets to a billionaire hedge fund manager.

He is the most prominent corporate executive convicted in the government’s sweeping investigation into insider trading.

The case, which caps a wave of successful insider trading prosecutions over the last three years, is a significant victory for the government, which has penetrated some of Wall Street’s most vaunted hedge funds and reached into America’s most prestigious corporate boardrooms.

It also demonstrated that prosecutors could win an insider trading case largely built on circumstantial evidence like phone records and trading logs. Previous convictions, as in the trial of Raj Rajaratnam, the hedge fund manager on the receiving end of Mr. Gupta’s assumed tips, have relied more heavily on the use of incriminating wiretaps.

Mr. Gupta is one of the 66 Wall Street traders and corporate executives charged with insider trading crimes by Mr. Bharara since 2009. Of those, 60 have either pleaded guilty or been found guilty. Juries have convicted all seven defendants who have gone to trial.

After a monthlong trial in Federal District Court in Manhattan, a jury took only two days to reach a verdict. It found Mr. Gupta guilty of leaking confidential information about Goldman to his former friend and business associate, Mr. Rajaratnam, on three different occasions in 2008. He was also convicted on a conspiracy charge.

The jury found Mr. Gupta not guilty of two charges of tipping Mr. Rajaratnam, including an allegation that he divulged secret news about Procter Gamble, where he also served on the board.

“Having fallen from respected insider to convicted inside trader, Mr. Gupta has now exchanged the lofty boardroom for the prospect of a lowly jail cell,” Preet Bharara, the United States attorney in Manhattan, said in a statement.

After the verdict was read in the courtroom, Mr. Gupta, 63, remained stoic. Just behind him, his wife, Anita, buried her head in her hands. His four daughters, who had squeezed into the front row of the spectators’ gallery each day during the trial, loudly sobbed and consoled one another. Several jurors cried as they left the courtroom.

Gary P. Naftalis, a lawyer for Mr. Gupta, said that his client would appeal the verdict. “This is only Round 1,” he said.

Judge Jed S. Rakoff, who presided over the case, set Mr. Gupta free on bail until his Oct. 18 sentencing. He faces a maximum sentence of 25 years in prison, but will probably serve less time. Mr. Rajaratnam is serving an 11-year jail term.

With its crackdown on insider trading, the government wants to protect investors, sending the message that the stock market is a level playing field and not a rigged game favoring Wall Street professionals. Insider trading, in the government’s view, also victimizes the companies whose information is stolen.

The criminal charges against Mr. Gupta, brought last October, stunned the global business world. Not since last decade’s corporate crime spree, when Jeffrey K. Skilling of Enron and Bernard J. Ebbers of WorldCom received lengthy prison terms, or the Wall Street scandals of the late 1980s that led to jail time for the financiers Michael R. Milken and Ivan F. Boesky, had a corporate executive fallen from such heights.

Mr. Gupta, a native of Kolkata, India, was orphaned as a teenager. After earning an engineering degree, he moved to the United States to attend Harvard Business School on a scholarship. He joined McKinsey in the early 1970s and in 1994 was elected global head, the first non-American-born executive to hold that post.

In 2007, Mr. Gupta retired from McKinsey and became a highly sought director at public companies, joining the boards of Goldman, Procter Gamble and the parent company of American Airlines. In recent years, Mr. Gupta had also devoted his time to humanitarian causes, raising millions of dollars to combat AIDS, tuberculosis and malaria.

“Having lived a lifetime of honesty and integrity, he didn’t turn into a criminal in the seventh decade of an otherwise praiseworthy life,” said Mr. Naftalis, articulating one of Mr. Gupta’s defenses.

Yet the government, which was represented by federal prosecutors Reed Brodsky and Richard C. Tarlowe, countered with evidence that Mr. Gupta brazenly divulged confidential board discussions at both Goldman and Procter Gamble.

“Here’s a man who came to this country and was a wonderful example of the American dream,” said the jury’s foreman, Richard Lepkowski, an executive for a nonprofit organization. “We wanted to believe that the allegations weren’t true, but at the end of the day the evidence was just overwhelming.”

Prosecutors built their case around phone records, trading logs, instant messages and e-mails. Mr. Gupta would participate in Goldman board calls, and afterward quickly call Mr. Rajaratnam, the founder of the Galleon Group. Mr. Rajaratnam would then trade shares in Goldman.

The government also presented three telephone conversations between Mr. Rajaratnam and Galleon colleagues that were secretly recorded by the F.B.I. On those calls, Mr. Rajaratnam boasted that he had a source inside Goldman.

“I heard yesterday from somebody who’s on the board of Goldman Sachs that they are going to lose $2 per share,” Mr. Rajaratnam said on one call, in October 2008.

The defense repeatedly maligned Goldman, suggesting that the close ties between the bank and Galleon meant that there were numerous sources at the bank feeding Mr. Rajaratnam information.

“The wrong man is on trial,” Mr. Naftalis told the jury.

The case has been an embarrassment for the executives at McKinsey, which Mr. Gupta ran from 1994 to 2003. A trusted adviser to top companies, McKinsey counts Sheryl Sandberg, the chief operating officer of Facebook, and James P. Gorman, the chief executive of Morgan Stanley, among its alumni.

“McKinsey’s core business principle is to guard the confidential and private information of its clients,” said a former McKinsey executive, who spoke on the condition of anonymity. “It is mind-blowing that the guy who ran the firm for so many years could be going to jail for violating that principle.”

Mr. Gupta met Mr. Rajaratnam around 2007. Back then, Mr. Rajaratnam was at his peak, a billionaire hedge fund manager with a superior investment record. For Mr. Gupta, who wanted to raise his profile in the lucrative world of money management, Mr. Rajaratnam was a top-notch connection.

“Rajaratnam offered Gupta many benefits,” said the prosecutor, Mr. Tarlowe, in his summation. “What was good for Rajaratnam and Galleon was good for Gupta.”

Together, the men helped start a private equity firm focused on India. Mr. Gupta invested at least $13 million in Galleon hedge funds and took on a fund-raising role at the firm. He accepted a highly paid advisory post at the investment giant Kohlberg Kravis Roberts Company.

During a telephone conversation between Mr. Rajaratnam and Anil Kumar, a former McKinsey executive who has pleaded guilty to insider trading, the two gossiped about Mr. Gupta’s ambitions to make more money, focusing on his job at Kohlberg Kravis.

“I think he wants to be in that circle,” said Mr. Rajaratnam, in August 2008. “That’s a billionaire circle, right?”

Mr. Gupta’s friends adamantly dispute the notion that he was driven by material gain. At the trial, his private banker at JPMorgan Chase pegged his family’s net worth at $130 million, in addition to his home in Westport, Conn., a waterfront mansion once owned by the retail executive J. C. Penney.

“I don’t know who came up with this business that Rajat had billionaire envy,” said Anil Sood, a childhood friend from India who now lives in Virginia. “He has always been quite content with his wealth.”

But one of the jurors, Ronnie Sesso, a youth advocate at the Administration for Children’s Services in Manhattan, had a different view.

“What did Mr. Gupta get by giving Raj this information?” said Ms. Sesso. “A need for greed.”

William Alden contributed reporting

Article source: http://dealbook.nytimes.com/2012/06/15/rajat-gupta-convicted-of-insider-trading/?partner=rss&emc=rss

DealBook: Executive Surrenders to Face Charges in Trading Case

Rajat Gupta at his home in Westport, Conn., on Wednesday morning.Douglas Healey for The New York TimesRajat Gupta at his home in Westport, Conn., on Wednesday morning.

Rajat K. Gupta, a former Goldman Sachs director and McKinsey Company managing director, surrendered to the Federal Bureau of Investigation on Wednesday morning to face charges of insider trading, the latest development in the government’s multiyear crackdown on illegal activity on Wall Street.

In charging Mr. Gupta, the government will attempt to tie up one of the biggest loose ends resulting from the investigation into the Galleon Group, which began nearly five years ago at the Securities and Exchange Commission. Raj Rajaratnam, the Galleon co-founder, was sentenced to 11 years in prison this month for making tens of millions of dollars by trading on confidential tips.

Authorities have broadly pursued insider trading on Wall Street, exacting guilty pleas from a chemist at the Federal Drug Administration, among others, as recently as this month. In the past two years, authorities have charged 55 people with insider trading; of those, 51 have pleaded guilty or have been convicted of swapping illegal tips about company earnings and other major corporate events. While the majority of those charged have been traders and analysts on Wall Street, Mr. Gupta, 62, is the first executive to be implicated from the upper echelons of corporate America.

The charges are a stunning reversal of fortunes for Mr. Gupta. A native of India, he graduated from Harvard Business School and had a global profile as an adviser to some of the nation’s most iconic companies. He served as a director at Goldman, Procter Gamble and the parent company of American Airlines. In addition to his professional pedigree, Mr. Gupta was a noted philanthropist, serving in coveted posts with the Bill and Melinda Gates Foundation.

Mr. Gupta’s case has been a tricky one for the government. Though his name came up repeatedly at Mr. Rajaratnam’s trial, both in testimony and in secretly recorded phone conversations, the Justice Department never filed charges against him. The S.E.C. filed an administrative action against Mr. Gupta, and he countersued. The agency later dropped the civil proceedings, but reserved the right to refile the case.

The strength of the government’s case is unclear, but details that emerged during Mr. Rajaratnam’s trial were explosive. In their original action, the S.E.C. accused Mr. Gupta of passing confidential information about Goldman and Procter to Mr. Rajaratnam, who then traded on the news. The agency also claimed that Mr. Gupta gave Mr. Rajaratnam advance word of Warren E. Buffett’s $5 billion investment in Goldman during the darkest days of the financial crisis, in addition to other confidential information.

Gary P. Naftalis, a lawyer for Mr. Gupta, said in a statement on Tuesday: “The facts demonstrate that Mr. Gupta is an innocent man and that he acted with honesty and integrity.”

But some of the most powerful evidence for prosecutors may not be presented at trial. Information about Goldman Sachs that the government says came from Mr. Gupta was recorded in phone calls between Mr. Rajaratnam and his employees; as such, the recordings could be inadmissible if Mr. Gupta’s case goes to trial.

In one call that the jury heard in the courtroom, Mr Rajaratnam told someone: “I heard yesterday from somebody who’s on the board of Goldman Sachs that they are going to lose $2 per share.” In a different call, Mr. Rajaratnam said, “I got a call saying something good is going to happen to Goldman.”

Mr. Gupta’s path to the heights of the global business elite began in India shortly after the country’s independence from Britain. He attended the prestigious Indian Institute of Technology before enrolling at Harvard Business School. After graduating near the top of his class, he joined McKinsey and quickly rose up the ranks of the white-shoe consultancy, which advises a large swathe of the Fortune 500 companies on corporate strategy, executive training and other business matters.

In 1994, at the age 45, Mr. Gupta was tapped to lead McKinsey. During his tenure, the firm expanded its global reach, aggressively moving into emerging markets like India and China.

While he oversaw an era of growth at the consulting firm, his reign was not without controversy. McKinsey encouraged Enron’s transformation from a sleepy energy pipeline company into a high-risk trading operation that ultimately collapsed amid an accounting scandal. Jeffrey Skilling, Enron’s former chief executive, was a McKinsey alumnus.

Article source: http://dealbook.nytimes.com/2011/10/26/gupta-surrenders-to-authorities-on-insider-trading/?partner=rss&emc=rss

DealBook: Caught in a Wide Web, a Trader Faces Prison

Michael A. Kimelman, with his wife, Lisa Kimelman, exits Federal District Court in Manhattan on Wednesday.John Marshall Mantel for The New York TimesMichael A. Kimelman, with his wife, Lisa Kimelman, exits Federal District Court in Manhattan on Wednesday.

Last Friday, on a crystalline autumn afternoon, Michael A. Kimelman sat in the backyard of his home in Larchmont, N.Y. His toddler son was perched on his lap, sucking on a pacifier. His older son played baseball with a friend, while his wife and daughter gawked at 10 fresh-egg producing hens housed in their new chicken coop.

It was a vision of suburban bliss, save one grim fact: Mr. Kimelman is on his way to prison.

At the Federal District Court in Manhattan on Wednesday, a judge sentenced Mr. Kimelman, a 40-year-old former trader convicted of insider trading, to two and a half years. He could have avoided prison by accepting a plea deal, but had rejected the offer and took his case to trial. In June, a jury found him guilty.

“This is a serious crime,” said Judge Richard A. Sullivan in a courtroom filled with Mr. Kimelman’s family, neighbors, and college fraternity brothers. “When people engage in this kind of conduct and get caught, they will get punished.”

Two years ago, Preet S. Bharara, the United States attorney in Manhattan, brought charges against 26 defendants in a seven-year insider trading conspiracy. At its center was Raj Rajaratnam, who once managed $8 billion at the Galleon Group and was among the world’s wealthiest hedge fund managers. He was convicted at trial, and prosecutors have asked for a prison term of as many as 24 years.

On Thursday, a judge will sentence Mr. Rajaratnam and is expected to hand down the longest prison term ever for insider trading.

But in Mr. Rajaratnam’s shadows lurked a mostly anonymous network of corporate executives, lawyers, consultants, and traders who exchanged confidential information about publicly traded companies. Twenty-four have either pleaded guilty or been convicted; one remains a fugitive.

Of the 13 who have received sentences, their average term has been three years.

The government placed Mr. Kimelman, a 40-year-old journeyman trader, at the outer edge of Mr. Rajaratnam’s insider trading web. His role in the case was marginal enough that prosecutors offered Mr. Kimelman a deal shortly after his arrest in 2009: Plead guilty to a charge of participating in the conspiracy and receive no prison time, only a sentence of probation.

“Of course I have regrets about not pleading guilty; I could’ve ended this ordeal two years ago,” said Mr. Kimelman in an interview at his home last week.

“But at the same time, I wouldn’t have been able to look myself in the mirror if I admitted to doing something that I didn’t do.”

Mr. Kimelman grew up in a comfortable, middle-class home in Tarzana, Calif., a town in the San Fernando Valley north of Los Angeles. He went east for college, graduating from Lafayette College in Pennsylvania, and then finished near the top of his class at the University of Southern California’s law school.

He landed a job practicing corporate law at Sullivan Cromwell, one of the country’s most prominent firms, but found the work uninspiring.

He had a growing interest in the stock market, and with the bull market raging in the late 1990s, he left law.

“At S.C., I was working 100 hours a week and sleeping under my desk,” Mr. Kimelman said. “Trading stocks seemed like a better life.”

He pursued a career in the fast-money world of “prop shops,” or proprietary trading firms, where dozens of traders buy and sell stocks with the firm’s money. The traders then split their profits with the firm, typically 50-50.

Though Mr. Kimelman lived comfortably, he was hardly a Wall Street titan. In his best year, Mr. Kimelman said he earned about $400,000 and never had more than $1 million in the bank.

In 2008, Mr. Kimelman teamed up with a friend, Emanuel Goffer, to form their own proprietary trading firm, Incremental Capital. They needed seed money to start the business, so they looked to Emanuel’s brother, Zvi Goffer, a fast-talking trader from Brooklyn. Zvi had recently landed a coveted trading job at Galleon working under Mr. Rajaratnam.

Zvi Goffer held out the promise of Mr. Rajaratnam investing $10 million into Incremental and getting access to Galleon’s research.

Aligning with Galleon and Mr. Rajaratnam, who was considered one of Wall Street’s savviest stock pickers, would have been a huge coup for Incremental.

“It’s very much who you know on Wall Street,” Mr. Kimelman said. “Some guys do their own work, but there is also lots of piggybacking off of other people’s stock ideas.”

Mr. Kimelman met Mr. Rajaratnam once while visiting Zvi Goffer at Galleon’s office. They shook hands, exchanged niceties. But Mr. Rajaratnam never put money into Incremental, and Galleon soon fired Zvi for poor performance. Zvi, nicknamed “Octopussy” because his arms reached into so many sources of information, joined Incremental and promised to use his contacts to help build the firm.

“Some guys under-promise and over-deliver,” Mr. Kimelman said. “Zvi was the exact opposite.”

At 5:30 a.m. on Nov. 5, 2009, a half dozen federal agents showed up Mr. Kimelman’s front door. While the agents searched the house with flashlights, his wife, Lisa, sequestered the children in the master bedroom. They handcuffed Mr. Kimelman and drove him away.

Federal prosecutors accused Zvi Goffer of paying nearly $100,000 in cash bribes to get secret information about big merger deals from two corporate lawyers. They said that Emanuel Goffer and Mr. Kimelman, as part of the conspiracy, knew about Zvi Goffer’s scheme. They also charged Mr. Kimelman with illegally trading in shares of 3Com in 2007.

During trial, the government played secretly recorded conversations during which Zvi Goffer arranged with Mr. Kimelman to meet in person rather than discuss things over the phone.

On 3Com, prosecutors showed phone records indicating that Zvi Goffer, who had received an illegal tip that the company was a takeover target, spoke with Mr. Kimelman for 25 minutes on the night of Aug. 7.

On Aug. 8, trading records showed that Mr. Kimelman bought a large block of 3Com stock just before a deal was announced. He earned about $250,000 in profits on the trade, the government said.

Mr. Kimelman’s lawyers blasted the government’s case, arguing that it was based on innuendo and guilt by association. They argued that even if Mr. Goffer told Mr. Kimelman to buy 3Com, there was no evidence that Mr. Kimelman knew that the recommendation was based on illegal information.

“They charged Michael Kimelman with insider trading, yet they have not brought a single witness to this courtroom to say, ’I told Mike about an insider,’” said Michael Sommer, a lawyer for Mr. Kimelman at Wilson Sonsini Goodrich Rosati, in his closing statement. “And with tens of thousands of recordings, text messages, instant messages, e-mails, there is not one which shows the slightest misconduct by this man.”

Judge Sullivan acknowledged that the jury’s decision was a close one.

“I thought it was a verdict that could go either way,” said the judge during a pre-sentencing conference.

In recent weeks, Mr. Kimelman has spoken with about dozen former prisoners about their incarcerations and received a range of advice. Find something to keep you busy so don’t go crazy. Keep your head down and you won’t get beat up.

Lisa Kimelman is a former Martha Stewart employee who now runs her own catering business. She has kept a sense of humor, writing a story in the October issue of Elle magazine about selecting a wardrobe for her husband’s trial. But Ms. Kimelman, the daughter of Michael H. Moskow, the former longtime president of the Federal Reserve Bank of Chicago, is also bitter about her family’s plight.

“My father worked for three presidents, and I was a White House intern,” Ms. Kimelman said. “I believed in our government, and it never occurred to me that our system would fail somebody.”

They have yet to tell their children, ages 7, 5 and 2, that their father is going to jail. Mr. Kimelman said that they wanted to learn his exact sentence before delivering the news. He worries about his family’s financial situation; his savings are wiped out and he is in substantial debt. Within 60 days, he must report to the Bureau of Prisons, which will assign him to a correctional facility.

Last week, as a reporter asked Mr. Kimelman his feelings about going to jail, Cam, his red-headed, freckled 5-year-old boy, ran up to him.

“Daddy, daddy, can I go inside and play Wii?” he asked.

“It’s the kids,” Mr. Kimelman said. “It’s the kids that kill you.”

Article source: http://feeds.nytimes.com/click.phdo?i=e47288e8990dbaf649cb57b1d59d22cb

DealBook: Chiesi Sentenced to 30 Months in Galleon Case

Shannon Stapleton/ReutersDanielle Chiesi arrives at the federal courthouse in Manhattan ahead of her sentencing.

8:15 p.m. | Updated

Danielle Chiesi, a former beauty queen turned hedge fund trader, got a thrill from pumping insiders for information and snaring secret tidbits about companies.

“It’s a conquest,” she said in a call recorded by the government. “It’s mentally fabulous for me.”

But her passion has landed her in prison.

On Wednesday, a federal judge in Manhattan sentenced Ms. Chiesi to 30 months in prison for trafficking inside information through a web of corporate players and Wall Street traders.

“For Danielle Chiesi, cultivating corporate insiders to gain an illegal trading edge was the ultimate elixir,” Preet Bharara, the United States attorney for Manhattan, said in a statement. “She was the vital artery through which inside information flowed between captains of industry and billionaire hedge fund managers, and she reveled in the conquest.”

The hearing was the latest chapter in the government’s sweeping crackdown on insider trading. Since 2009, some 49 have been charged as part of the investigation, and 46 have been convicted.

A major line of the inquiry has centered on Raj Rajaratnam, the co-founder of the Galleon Group hedge fund, who was convicted in May.

While Ms. Chiesi did not testify against Mr. Rajaratnam, her recorded voice became a regular feature at his trial. Their conversations, along with the testimony of Adam Smith, a former Galleon employee, proved crucial. Mr. Rajaratnam is to be sentenced on Sept. 27 and faces up to 25 years in prison.

In January, Ms. Chiesi pleaded guilty to three counts of participating in the conspiracy. She acknowledged leaking information about I.B.M., Advanced Micro Devices and Sun Microsystems. Her activities, prosecutors have said, earned her hedge fund $1.7 million.

Prosecutors sought a sentence of up to 46 months. Ms. Chiesi’s lawyers had asked for leniency, blaming her actions on a tormented love affair with her former boss.

Standing before Judge Richard J. Holwell in a Lower Manhattan courtroom, Ms. Chiesi apologized as she choked back tears.

“I know that there is a punishment for breaking the law, but it won’t happen again,” said Ms. Chiesi, who wore a pink dress and matching pumps with her platinum-blond hair pulled back.

But Judge Holwell was unmoved. Along with the 30-month prison term, Ms. Chiesi was sentenced to two years of supervised release, 250 hours of community service, a $25,000 fine and mandatory mental health and alcohol treatment. She had previously agreed to pay the Securities and Exchange Commission $540,000.

“The message to Wall Street needs to be clear: if you trade on inside information, you will be caught,” Judge Holwell said.

The judge said the community service, in particular, would help “adjust her moral compass, which obviously fell by the wayside.” He did acknowledge that Ms. Chiesi, who had earlier told the judge that she was receiving psychiatric care, suffered from a borderline personality disorder.

On Wednesday, her lawyer, Alan R. Kaufman, said, “This is not a pleasant day by any means, but it is at least over.”

After the hearing, a smiling Ms. Chiesi approached federal prosecutors and agents for the Federal Bureau of Investigation. She told them that “if you’re ever going to knock on my door then do it in the afternoon,” in a nod to her early-morning arrest in October 2009. Prosecutors wished her “good luck,” as Ms. Chiesi left the courtroom with her mother, sister and two nieces, who greeted her with an embrace.

The sentence brings her curious criminal case to a close.

A Binghamton, N.Y., native, Ms. Chiesi began her Wall Street career in the late 1980s. She later landed at New Castle Funds, a hedge fund that was spun off from Bear Stearns.

Ms. Chiesi, 45, became known on Wall Street for her colorful personality and robust Rolodex. Her specialty was the technology world, in which she built a network of sources whom she prodded for corporate secrets. Her tipsters included Robert W. Moffat Jr., a former senior executive at I.B.M., who has since pleaded guilty to participating in the scheme.

After gathering a few nuggets, Ms. Chiesi would pass the information to Mr. Rajaratnam, among other traders. In July 2008, a source informed Ms. Chiesi that Akamai, an Internet company, was going to report less-than-stellar results. “I just got a call from my guy,” she later told Mr. Rajaratnam. “I played him like a finely tuned piano.”

Unbeknownst to the pair, the government was listening. Such secretly recorded tapes ultimately became the linchpin in the government’s case.

They also provided a window into Ms. Chiesi’s flirtatious style.

She alternately referred to Mr. Rajaratnam as “baby” and “honey.” She also struck up romances with Mr. Moffat of I.B.M. and Mark Kurland, her boss at New Castle.

Her affair with the married Mr. Kurland lasted for nearly 20 years and spanned multiple jobs. A 22-year-old Ms. Chiesi met Mr. Kurland, then 40, in 1988 while working at a brokerage firm. Mr. Kurland later started New Castle, and hired his lover to join the team.

Both eventually joined the insider-trading ring. Mr. Kurland already pleaded guilty to insider trading, and was sentenced to 27 months in prison.

Ms. Chiesi’s lawyers blamed the affair — and Mr. Kurland — for involving her in the illicit plot.

Her “emotional and financial well-being were inextricably linked with Kurland,” her lawyer, Mr. Kaufman, said in a recent court filing. Her counsel continued to emphasize the connection at the sentencing.

“We continue to believe that Dani’s sentence should not have been any longer than the sentence received by her boss at New Castle,” Mr. Kaufman said in a statement. “But we respect the judge’s thoughtfulness and thoroughness.”

While Ms. Chiesi initially fought the charges, ultimately the government’s secret recordings were insurmountable. Some of the recorded conversations even proved prophetic.

“You put me in jail if you talk,” she said in an August 2008 call with an associate. “I’m dead if this leaks. I really am, and my career is over.”

Article source: http://feeds.nytimes.com/click.phdo?i=249106a6f2072d9abe7ad1f738a2ff35

DealBook: Danielle Chiesi Settles S.E.C. Action

Danielle Chiesi, the hedge fund trader who pleaded guilty this year to charges of insider trading, agreed to pay $540,535 to settle a related civil action brought by the Securities and Exchange Commission. Her payment includes $500,000 of improper gains and $40,535 of interest. Ms. Chiesi, a central figure in the prosecution of Raj Rajaratnam, is scheduled to be sentenced in Federal District Court in Manhattan on July 20.

Article source: http://feeds.nytimes.com/click.phdo?i=cf7e1e3523e92ec6bf65fd6e4523290a

High & Low Finance: For Prosecutors, the Case That Got a Head Start on the Crime

With insider trading, the answer until now was always simple: the crime came first. But the case against Raj Rajaratnam, the hedge fund manager who was convicted by a federal court jury on Wednesday, stemmed from an investigation that began well before the crimes were committed.

And that made all the difference.

In normal insider trading cases, whether the ones involving someone’s brother-in-law or the celebrated one that brought down Ivan F. Boesky a generation ago, the investigation started only after someone noticed suspicious trading, like the purchase of a stock just before a takeover offer was announced or the short sale of the stock just before bad earnings news was released.

Once the investigation began, the Securities and Exchange Commission could find out who made the trades, and could ask why they chose to make the trades in question. It could also search for a source who might have leaked the “material nonpublic information,” to use the legal term for inside information.

That investigative technique often failed to find proof, even if the investigators were convinced the law had been broken. It was more likely to work with small fish than with whales. If the trader in question had never bought options before and then made a killing by purchasing call options just before a merger was announced, the investigators would be virtually certain there had been a leak.

If it turned out that the chief financial officer of the company being acquired was also a neighbor of the lucky investor, and that phone records showed they had talked just before the trade was made, the case was clear. In many cases, either leaker or leakee would admit what had happened, and often identify others who had shared in the tip.

But that technique is all but useless if the suspect is a hedge fund manager like Mr. Rajaratnam. His firm made dozens, if not hundreds, of trades every day. It had a bevy of analysts and access to all the research by Wall Street firms.

If a trade were somehow questioned, the firm could come up with any number of reasonable-sounding explanations, as Mr. Rajaratnam’s lawyer, John M. Dowd, did in the case that ended in his conviction.

But those explanations sounded pretty lame when stacked up against the audio tape recordings of conversations in which corporate insiders gave confidential information to Mr. Rajaratnam.

Those tapes exist only because the Justice Department got involved in the investigation at the beginning. Presumably, it had reason to believe that insider trading was happening, and that persuaded a federal judge to approve wiretaps.

As a result, the F.B.I. could listen in as the information was provided just before trades were made. And they could hear Mr. Rajaratnam discuss ways to throw off a normal insider trading investigation. He suggested sending choreographed e-mails with fake reasons for a trade. He recommended trading in and out of a stock that was being accumulated because of inside information.

It seems likely that Mr. Rajaratnam had used just such tactics in the past to explain away trades that had aroused suspicion. But hearing him describe them turned a defense into a virtual confession.

Those tapes “showed that the defendant knew what he was doing was not only wrong, but illegal,” said a prosecutor, Reed M. Brodsky, in closing arguments to the jury.

Insider trading was a common practice at Galleon. There were numerous leakers, and they came from the cream of American business — from insiders at major corporations like Intel and Goldman Sachs and from McKinsey, perhaps the most prestigious management consulting firm. Chief executives of smaller firms provided Mr. Rajaratnam inside information about their companies, and profited because they were allowed to invest in his funds.

Galleon ended up sounding like a criminal enterprise, where illegal information was bought through elaborate chains aimed at concealing the source of the money. Hedge fund investments were made in the name of a housekeeper, and money was transferred overseas and back merely to cover up the trail.

Article source: http://feeds.nytimes.com/click.phdo?i=47bfcf4bfa1ff3d37e13d7b456c13879

DealBook: Former SAC Manager Pleads Guilty to Insider Trading

Donald Longueuil, a former portfolio manager, pleaded guilty to insider trading.Louis Lanzano/Bloomberg News Donald Longueuil, a former portfolio manager at SAC Capital Advisors, pleaded guilty to insider trading.

8:07 p.m. | Updated

As the jury continued to deliberate in the trial of Raj Rajaratnam, the government notched another guilty plea in its investigation of insider trading at hedge funds.

Donald Longueuil, a former portfolio manager at SAC Capital Advisors, pleaded guilty to conspiracy and securities fraud before Judge Jed S. Rakoff in Federal District Court in Manhattan.

He is the fifth individual to plead guilty in the government’s investigation of so-called expert network firms. These firms serve as matchmakers, connecting traders to the employees of publicly traded companies who are paid to provide insights into their businesses.

Mr. Longueuil, 35, said he purchased stock in the Marvell Technology Group after receiving secret information about the company’s earnings before they were publicly announced. He also admitted to destroying his hard drive, which contained incriminating evidence.

Under an agreement with prosecutors, Mr. Longueuil faces a prison sentence of 46 months to 57 months. Judge Rakoff could depart from those guidelines. Mr. Longueuil also agreed to forfeit $1.25 million at his sentencing, which is scheduled for July 29.

“I am sorry for my actions, and the pain that I have caused my family and loved ones,” said Mr. Longueuil, choking back tears. “I have learned a lot from my experience, and I look forward to applying these lessons as I move forward with my life.”

Federal prosecutors arrested Mr. Longueuil, 35, in February along with Noah Freeman, another SAC Capital portfolio manager; Samir Barai, the head of Barai Capital Management; and Jason Pflaum, an employee of Mr. Barai’s. Mr. Freeman and Mr. Pflaum are cooperating with the government; Mr. Barai has not yet entered a plea.

Neither SAC nor its billionaire founder, Steven A. Cohen, has been accused of any wrongdoing. At the time of their arrest, SAC said it was “outraged” by the conduct of Mr. Longueuil and Mr. Freeman.

Mr. Longueuil said he received illegal stock tips from 2006 to last year and pleaded guilty to purchasing Marvell stock in May 2008 based on inside information from Mr. Barai. According to court filings, the source of that original tip was Winifred Jiau, a former employee of Primary Global Research, an expert network firm. Ms. Jiau has pleaded not guilty to conspiracy charges.

Judge Rakoff scheduled Mr. Longueuil’s sentencing for July 29. Mr. Longueuil, whose travel had been restricted to New York and Connecticut, was granted a special request to travel next week to Sarasota, Fla., for his future mother-in-law’s 60th birthday party.

Mr. Longueuil’s midday court appearance provided a ready distraction for the lawyers and reporters awaiting a verdict in the trial of Mr. Rajaratnam, the co-founder of the Galleon Group hedge fund.

As the fourth day of deliberations wore on, the tense atmosphere surrounding the trial surprisingly began to ease.

Reed Brodsky, a prosecutor, chatted up the media as he entered the courtroom. Andrew Michaelson, another prosecutor, stood in the hallway also shooting the breeze. John M. Dowd, a lawyer for Mr. Rajaratnam who has shown a cantankerous side during the trial, also proved more affable on Thursday, regaling reporters with stories about his past trials and discussing plans for his coming vacation on Cape Cod.

Article source: http://feeds.nytimes.com/click.phdo?i=43663eb73f7b1df0fecf5043d73e72da

DealBook: F.B.I. Agent Describes Tips and Galleon Trades

8:43 p.m. | Updated

Over the last three weeks, jurors in the insider-trading trial of Raj Rajaratnam have heard more than a dozen witnesses, been presented with pages of data, listened to snippets of secretly recorded phone calls and been introduced to an alphabet soup of stocks.

On Tuesday, the prosecution sought to connect all the dots as it started to wrap up its case against the hedge fund manager, who is accused of making millions of dollars in illicit stock trades.

Federal prosecutors pointed to a dizzying array of documents related to those stocks, including records of calls, trades, instant messages and e-mails between Mr. Rajaratnam, the co-founder of the Galleon Group hedge fund, and a network of contacts.

In each case, they sought to create a narrative of illicit activity. All told, prosecutors revisited 13 stocks, including Hilton Hotels, a company that was acquired on July 3, 2007 by the Blackstone Group.

The Galleon networkAzam Ahmed and Guilbert Gates/The New York Times Click on the above graphic to get a visual overview of the Galleon information network.

A phone log was shown to jurors, detailing a complex tree of calls culminating in the purchase of Hilton shares by Mr. Rajaratnam, prosecutors contend..

The first call was from the Hilton Group to an executive at Moody’s Investors Service, the day before the announcement, alerting the executive to the deal.

Calls then flowed from a junior analyst at Moody’s, Deep Shah, to Roomy Khan, a cooperating witness who has pleaded guilty to insider trading. About half an hour later, Ms. Khan called Mr. Rajaratnam, the phone records show.

The next day, 400,000 shares of Hilton stock were bought using Mr. Rajaratnam’s trading codes. Though other funds at Galleon had previously owned shares in Hilton, the purchase marked the first time all year that Hilton was bought using Mr. Rajaratnam’s codes, according to James C. Barnacle Jr., an F.B.I. agent who testified Tuesday.

Earlier, jurors heard testimony from Rajiv Goel, a former executive at Intel who has pleaded guilty to leaking inside information about his former employer to Mr. Rajaratnam.

Mr. Goel testified that Mr. Rajaratnam had bought Hilton shares in Mr. Goel’s personal trading account. On Tuesday, prosecutors produced that document, which detailed the purchase of 7,500 shares of Hilton on the day of the announcement placed through a Galleon computer.

All told, the trade made Galleon more than $4 million, Ms. Khan more than $630,000 and Mr. Goel about $78,000, prosecutors claimed.

Prosecutors also highlighted trading in ATI Technologies, which they say netted Mr. Rajaratnam nearly $23 million. Anil Kumar, a former McKinsey Company executive, said in trial testimony that he passed along illegal tips about ATI’s acquisition to Mr. Rajaratnam before it was announced in late July 2006.

In court on Tuesday, prosecutors presented an instant message conversation between Mr. Rajaratnam and another hedge fund manager with whom Mr. Rajaratnam was invested.

In the April 2006 exchange, Mr. Rajaratnam tells the hedge fund manager to “buy some atyt,” referring to the company’s stock symbol. When the manager asks why, Mr. Rajaratnam writes: “i will tell u why on fon.”

Prosecutors then showed an e-mail that Mr. Kumar received in May 2006 suggesting ATI was amenable to the acquisition. Then they showed that Mr. Rajaratnam’s position in the stock swelled, reaching almost $90 million before the acquisition was announced.

Mr. Barnacle, the F.B.I. agent who spent Tuesday walking jurors through the various trades and communication records, will be the last witness called by the government before it rests its case. On Wednesday, he is expected to go through records and trades Mr. Rajaratnam is said to have made related to Polycom and Goldman Sachs.

Article source: http://feeds.nytimes.com/click.phdo?i=8bfe5181d0994d278192a88c3b37518b

DealBook: Ex-Galleon Worker Tells of Gathering Tips on Intersil

“I shared it with Raj.”

Those five words served as a mantra for Adam Smith, a government witness who took the stand on Tuesday in the insider trading trial of Raj Rajaratnam, the founder of the Galleon Group hedge fund.

Mr. Smith, a former Galleon portfolio manager, is the first former Galleon employee to testify during the trial. He has pleaded guilty to participating in an insider trading conspiracy with Mr. Rajaratnam.


The Galleon networkAzam Ahmed and Guilbert Gates/The New York Times Click on the above graphic to get a visual overview of the Galleon information network

Known for his rapier wit around Galleon’s offices, the 39-year-old Mr. Smith was dead serious on the witness stand on Tuesday as he took the jury through four discrete insider trading vignettes involving technology companies. DealBook will have the full report later. For now we’ll focus on the vignette involving Intersil, a chip maker.

Mr. Smith, who joined Galleon in 2002 after a stint as an investment banker at Morgan Stanley, said he developed a relationship with an Intersil executive named Jason Lin who worked in Taipei, Taiwan. Once a quarter, Mr. Smith would travel to Taiwan to meet with Mr. Lin. They initially discussed industry issues and “more qualitative types of information,” said Mr. Smith.

But over time, Mr. Smith testified, he asked Mr. Line to be more specific. “There did come a time when he was able to give me Intersil’s quarterly revenue numbers,” Mr. Smith said.

Mr. Smith, who covered Intersil for Galleon, said this information was most useful “when it varied from Wall Street consensus.” He said he passed the information on to Mr. Rajaratnam.

“Why?” asked Andrew Michaelson, the prosecutor.

“I was getting an edge on a company I covered,” Mr. Smith said. “My motivation was to improve the profitability of my firm and to help Raj.”

Mr. Michaelson asked Mr. Smith to define “an edge.”

Mr. Smith said it was a source of information that could inform a decision about buying and selling a stock. “It’s the key component to arbitraging consensus, which was essentially our strategy,” he said. “Whenever an event would occur that would vary from consensus, we would want an edge.”

Mr. Lin’s information would help Mr. Smith, a Harvard Business School graduate, in his research on Intersil. It would help “build my Excel model,” Mr. Smith explained. “I would plug in the revenue and estimate profit and loss.”

When Mr. Michaelson asked Mr. Smith if he also did actual security analysis on Intersil, Mr. Smith said that he did but that he really did not consider the confidential revenue numbers provided by Mr. Lin to be legitimate research.

“Getting the number is more like cheating on the test,” Mr. Smith said.

Intuiting that Mr. Smith’s simile could have resonated with the jury, Mr. Michaelson continued.

“Did you do your homework on Intersil?” he asked.

“Yes,” Mr. Smith said.

“Did you also cheat on the test?”

“Yes,” Mr. Smith said.

Article source: http://feeds.nytimes.com/click.phdo?i=52019a8d4aabb646ce34adbf3d8b9e23